Audio 3:56
China scraps floor on lending rates

Rebecca HyamUpdated
Mon 22 Jul 2013, 7:22 PM AEST

Chinese banks have been granted the power to set their own lending rates, in a move designed to speed up financial reforms across the country. The People's Bank of China is removing the floor on lending rates to help stimulate competition in the banking sector and encourage lending to businesses and consumers. It's an important step as China tries to distance itself from an investment and export reliant economy to one dominated by local consumption.

Transcript

MARK COLVIN: Chinese banks have been granted the power to set their own lending rates in a move designed to speed up financial reforms across the country.

The People's Bank of China is removing the floor on lending rates to help stimulate competition in the banking sector and encourage lending to businesses and consumers.

China needs to move away from an economy reliant on exports and investment to one dominated by local consumption.

Finance reporter Rebecca Hyam.

REBECCA HYAM: The liberalisation of lending rates is a strong sign that China's new leadership is committed to market-oriented reforms despite the country's slowing economic growth.

The move means commercial banks can compete aggressively for borrowers, bringing business costs down over time.

Andrew Hordern is a regional economist with IMA Asia. He says the development marks important progress.

ANDREW HORDERN: What the People's Bank of China has done on the weekend is said to the banks that they are allowed to lend money at whatever interest rate that they like. Previously there was a bottom limit. They could not loan to below 4.2 per cent, but now they're open to lending at any rate they like.

REBECCA HYAM: But HSBC's chief economist in Australia, Paul Bloxham, says these changes are really more a symbolic gesture.

PAUL BLOXHAM: This is a fairly small move in the scheme of things but what it does do is signal that their reform agenda is making some progress. They are prepared to do things to reform the financial system and help to better allocate capital within that financial system. It's a fairly small move because in the scheme of things 90 per cent of lending was happening above that floor anyway.

REBECCA HYAM: And while financial markets in the region have responded favourably to the changes, most analysts believe the People's Bank of China needs to do more.

They're calling for a removal of the ceiling that limits Chinese deposit rates, something touted as having substantial flow-on benefits for Australia.

ANDREW HORDERN: What would be good for the Australian economy is when the next step happens and it's a much bigger step. It's when they remove the top cap on the deposit ratio. Because what that will mean is that households will be able to get more money in the bank when they put in their term deposits etc, which will lift up the amount of money that households have.

Households will get richer, households will demand more, households will build more housing, and more housing will need more iron ore and help the Australian economy.

REBECCA HYAM: And as China embarks on its financial transformation, the government in Japan has been given a clear mandate to continue with its own economic reforms.

Prime minister Shinzo Abe's strong win in yesterday's Upper House election means he has a solid platform to continue efforts to kick-start the world's third-biggest economy.

Andrew Hordern says there are some striking parallels between Shinzo Abe's comeback and recent political events in Australia.

ANDREW HORDERN: Shinzo Abe's story is actually very similar to Kevin Rudd in the sense that he was prime minister before and he came back for a second run and on a wave of popularity, people being annoyed with the performance of the DPJ (Democratic Party of Japan) in the previous term.

So I think people have liked what we're seeing with Abe and Abe is out there and he's trying things. He's trying to increase the inflation rate, he's trying to get the economy moving again and people have liked that and decided to put their votes behind him.

And while these have helped to boost Japanese stocks, weaken the yen and stimulate growth, Paul Bloxham says it's the third plank of tough structural reforms that will be crucial to securing Japan's economy in the long term.

PAUL BLOXHAM: The difficulty of course is what we've seen so far is the low hanging fruit. Boosting fiscal policy, boosting monetary policy - those two were easier than that last set of structural reforms that will involve tackling vested interests and demographic problems and immigration and the labour market.

And so even though he's got the mandate, it's still not clear that we're necessarily going to see a strong reform agenda and that's of course what's worth watching.